SEC Rejects Winklevoss Bitcoin ETF, Sending Price Tumbling

On Friday, government regulators dampened the dreams of bitcoin enthusiasts, speculators and entrepreneurs Tyler and Cameron Winklevoss when it declined to approve the twins’ proposal for a bitcoin investment vehicle that would be easily accessible to millions of Americans through common accounts such as IRAs and 401(k)s.

The news initially prompted a selloff in bitcoin, with the price falling 18% from nearly $1,300 to $1,060, but it has since rebounded slightly to above $1,100. With some speculative purchases in the hours leading up to the decision, the price is down 7% for the last 24 hours. The total value of all outstanding bitcoins dropped from $20.5 billion to $18 billion.

In its statement, the SEC stated, "the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest."

Cameron and Tyler Winklevoss (Alli Harvey/Getty Images for Spotify)

The agency noted that, to be approved, an exchange offering a bitcoin ETF would need "surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated." It declined to comment beyond the published statement.

Tyler Winklevoss, chief financial officer of Digital Asset Services, released a statement via email: "We remain optimistic and committed to bringing COIN [the proposed ticker] to market, and look forward to continuing to work with the SEC staff. We began this journey almost four years ago, and are determined to see it through. We agree with the SEC that regulation and oversight are important to the health of any marketplace and the safety of all investors." (Listen to my podcast with the Winklevoss twins here or onGoogle Play, iTunes, StitcherorTuneIn Radio.)

Spencer Bogart, head of research at cryptocurrency venture capital firm Blockchain Capital, didn't believe the denial would have too negative an impact on the bitcoin price. "The compelling fundamental growth story remains. Bitcoin didn’t have an ETF for the first eight years, and it might not for the next eight years," he said.

Noting that the price was down only 7% for the day, Chris Burniske, blockchain lead at ARK Investment Management, agreed: "This shows the fundamental support that the space has and that it’s maybe not as speculatively driven as many people believe."

The decision was an disappointing resolution to the Winklevoss twins’ nearly four-year-long journey to be the first creators of an exchange-traded fund (ETF) out of bitcoin, the cryptocurrency launched by a mysterious creator and once known for fueling online drug marketplaces. It represented a breakthrough for combining several technologies that made it possible to send money via the internet anywhere in the world quickly and cheaply, with certainty that original holder of the money wasn’t sending the recipient a copy of the money that could then be spent again.

The rejection does not mark the first time the twins were involved early in a venture that they ultimately were not able to ride out. They first became known for claiming that Facebook chief executive officer Mark Zuckerberg stole the idea for a social network from them when they were Harvard undergrads. Since then, they have become one of the largest owners of bitcoin, and now run the Gemini cryptocurrency exchange, as well as invest in startups through Winklevoss Capital. Becoming the first to offer a bitcoin ETF, which most experts agree is inevitable, would have marked a moment of redemption for the twins.

Bitcoin’s image has improved since its early days as investors in developed countries have bought it because it is often compared to a digital gold and users in developing countries without good credit card systems have used bitcoin in order to make purchases on their smartphones and send remittances. (In developed economies, a number of large retailers such as Dell, Expedia and Overstock enable customers to pay with it.) Plus, citizens in countries whose currencies were faltering or in doubt often turned to it during times of crisis, such as Grexit, Brexit, and in troubled economies such as Venezuela.

Still, with the market around bitcoin still relatively immature, the currency has been subject to hackings, including one of $66 million last summer, at Hong Kong-based Bitfinex. News events such as this shook investor confidence and have contributed to the image of bitcoin as a magnet for criminals.

Interpreting the SEC's reasoning, Bogart said, "If most bitcoin today was moved to heavily regulated exchanges, an ETF would have better prospects." But currently, high volumes are traded on unregulated exchanges such as Bitfinex, as opposed to regulated ones such as the Winklevoss's Gemini or Coinbase's Global Digital Asset Exchange (GDAX).

Industry organizations were disappointed by the SEC's decision. Jerry Brito, executive director of Coin Center, a cryptocurrency advocacy group, said the agency's basis for rejection "creates a chicken and egg problem. How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren’t allowed to bring products to market that grow domestic demand for digital currencies like Bitcoin?”

Perianne Boring, founder and president of the digital asset and blockchain trade association Chamber of Digital Commerce said it was part of an overall picture of the U.S. being uncompetitive in the blockchain industry. "This was an opportunity for the United States securities industry to implement something innovative and new and we’re not taking advantage of that. It’s leaving the U.S. behind in terms of blockchain adoption on the global stage.... We’ve seen companies in the U.S. -- the founders are Americans, they’ve raised money from U.S. investors and they can’t get the licensing or regulatory approval they need to operate here and so they’re moving to Asia."

Most analysts don’t believe the SEC rejection marks a nail in the coffin of bitcoin. Though the price of the cryptocurrency has gone through bubbles before, in recent years, it has stabilized and studies have shown its volatility now more closely resembles that of oil.

The rejection of the Winklevoss proposal also does not necessarily end the prospects for a bitcoin ETF. Two more similar filings are working their way through the SEC. One by SolidX that has a deadline of March 30. The other filing, which does not have a deadline, is by Grayscale Investments, which already operates the Bitcoin Investment Trust (GBTC), a private placement (currently suspended pending the ETF filing) for wealthy investors that trades on the open market after a one-year lockup period. However, Bogart says "the prospects for the other filings are not great because the grounds for disapproval here appear to be related to the underlying bitcoin markets instead of something specific to the Winkelveoss filing."

The decision was eagerly anticipated in the bitcoin community, partially because approval would mean vindication for enthusiasts who have been championing the cryptocurrency through the volatility, hacks and other negative attention it has received. An SEC call line for an unrelated event today received numerous calls about the ETF, prompting an agency staffer to say, “please stop asking,” according to CoinDesk. Bogart, who used to work at ETF.com said he had never seen an ETF decision be so closely watched. Early anticipation of approval in the community later gave way to skepticism, with Bogart and other analysts giving approval a chance of 25% or less. A futures contract betting on the outcome was below 50% in the weeks leading up to the decision, but finally passed into positive territory on Friday in the final hours.

Both Burniske and Bogart noted the thoroughness and thoughtfulness of the SEC's decision. Burniske said of the SEC's 38-page statement, "They clearly put a lot of thought into investigating the bitcoin markets and took time to explain their reasoning."

Bogart said even the fact the SEC took nearly four years to investigate bitcoin might seem to somewhat legitimize bitcoin to investors. "If I’m an institutional trading desk, maybe now I can’t do the ETF, but [the SEC decision-making process] has changed my appetite to trade bitcoin as a whole."